While competitors fell, First State survived

Conservative focus key for Macomb bank

"The focus here has not been about generating revenue, but in building value. There was never any point in time we were out chasing earnings," said Gene Lovell, First State Bank's president and CEO.

From 2000 to 2007, First State Bank of St. Clair Shores was the tortoise losing the race, and losing it badly.

During the community banking boom that preceded the Great Recession, if First State had been publicly traded, its shareholders might very well have complained that the bank wasn't making the return on equity that its competitors were.

But by being conservative throughout the boom days, First State avoided the quick-return temptations of subprime mortgages. It didn't make risky commercial real estate loans on the premise that property owners would always appreciate, so creditworthiness was something to be worked around.

"The focus here has not been about generating revenue, but in building value. There was never any point in time we were out chasing earnings," said Gene Lovell, the bank's president and CEO.

The bank wasn't immune to the recession and loan defaults. It lost money — a lot of money for a small community bank. It went from net income of $1.6 million in 2006 to a loss of $8.7 million in 2007. It lost $5.5 million in 2008 and $5 million in 2009 before returning to profitability in 2010, as other local banks were locked into downward spirals.

And assets fell from a peak of $750 million in 2006 to about $575 million today.

Losses aside, Lovell said, First State's old-fashioned way of banking based on nearly 80 years of family ownership brought it through the recession relatively unscathed and poised for growth.

If First State was the Macomb County tortoise, the hares it was competing with didn't just finish behind it. They collapsed and died along the way.

As the recession began making itself felt in 2007, the competitive banking landscape in Macomb County was filled.

There was Community Central Bank of Mt. Clemens; Warren Bank; Lakeside Bank of Sterling Heights; Peoples State Bank of Madison Heights; and Citizens State Bank of New Baltimore.

And community banks based in other counties had a strong presence in Macomb County — Paramount Bank of Farmington Hills, Fidelity Bank of Dearborn and Citizens First Bank of Port Huron.

None of them remain. All were shut down by federal and state regulators after their loan portfolios had blown up and their losses had gone on for years. First State Bank is the only bank left based in Macomb County. And large regional banks such as LaSalle and National City that had large market shares in the county were bought in fire sales by other large banks.

"I knew we'd survive, but I didn't know how much pain we would have to bear," said Lovell, who joined the bank as an auditor in 1991, became CFO in 2004 and was named president and CEO in 2008, just as the recession hit.

Dealing with the downturn

The bank had seen warning signs of a downturn early in 2007 and began selling off a large chunk of what had been its bread and butter, its home-mortgage portfolio, to other banks still eager to buy those loans.

At the end of 2007, the bank decided to aggressively take write-downs on troubled commercial loans by adding significantly to its provisions for loan losses on the balance sheet.

"We wanted to deal with it and get it behind us," said Lovell.

The loan-loss provisions went from $4.6 million in 2006 to $19.1 million in 2007, and the bottom line from net income of $1.6 million to a loss of $8.7 million.

The bank has steadily grown the bottom line since then, with net income hitting $4.7 million in 2013.

"I can't say we foresaw how bad it was going to be. The problems kept on coming, but we were a very solid bank to begin with, and when things kept on snowballing, we were prepared," said Lovell. "I knew we'd come through it."

The key metric eyed by regulators is the Tier 1 ratio of equity capital to assets. Anything below a 2 percent ratio put a bank on death watch, a level hit by every other bank based in Macomb County. First State's never got below 8.1 percent. Today, it stands at 10.76.

Lovell has beefed up his mortgage group in the last three years, from a team of three at the bottom of the recession to 15 now, and he wants to be more active in commercial lending.

First State's loan portfolio has climbed steadily, from $281 million in 2010 to $368 million now.

"We never stopped lending. When other banks were getting out of Dodge, we kept lending. We were here to serve the community," said Lovell.

First State opened its 12th branch in Sterling Heights in December. In January, it consolidated a banking branch and a stand-alone loan office into a new location in Clinton Township, and in January it signed a lease doubling the space in a mortgage office it opened in Oakland County at Orchard Lake and 14 Mile roads in December 2012.

Lovell would like to add to the bank's presence with a retail banking branch there, too. "I'd like to explore that as a possibility, if not later this year, then next year," he said.

"Gene Lovell is a good, conservative banker with a good reputation. It's a very well-run bank. They've been around a long time, and they've gone through a lot of economic cycles. To weather them all is impressive. It really is," said J. Grant Smith, president and CEO of Clarkston State Bank, which barely weathered the last cycle itself but is thriving again.

"They did a good job of navigating the recession, and they've done a great job as a community bank. They've built a good footprint in Macomb County," said Patrick McQueen, the former state banking commissioner who consults for his son Charles' firm, McQueen Financial Advisors of Royal Oak, and BBK Ltd. in Southfield.

"First State has a long and rich history and has been a jewel on the east side," he said.

The Halfway Bank

First State opened its doors on Oct. 20, 1917, as the Halfway State Bank, in a building at the intersection of Nine Mile Road and Gratiot, launched with a capitalization of $25,000.

The area was first settled by Irish and German immigrants in the 1830s, and in October 1897, a U.S. Post Office branch was opened with the name of Half-way, because it was about halfway on the long trip up Gratiot Avenue from downtown Detroit to the county seat in Mt. Clemens.

The village of Halfway was incorporated in 1924 and reincorporated as the city of East Detroit, now Eastpointe, in 1929. That's when the bank changed its name to the First State Bank of East Detroit, just in time for the Great Depression.

Struggling to stay afloat, the bank was reorganized in 1935, taking on capital from new investors, which included Christian Nill, a butcher who was also the city's mayor, who joined the board of directors. His nephew, William Nill, is a former president of the bank and the retired chairman.

The Nill family remains the bank's largest shareholder, with four members on the board of directors. The bank moved its headquarters to St. Clair Shores in 1989.

Lovell said the family tradition kept the bank grounded during the go-go days that preceded the recession.

"The family structure lends itself to caution," Lovell said. "To being conservative. This has never been an investment strictly to generate earnings. The focus has always been on building value."

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